Most Commented

More judges balking at SEC settlements where no one admits anything

A growing number of federal judges — one of the latest in Denver — is balking over the U.S. Securities and Exchange Commission's practice of accepting financial settlements from defendants who don't admit culpability.

Critics of the long-standing SEC practice say it's shoddy justice, but proponents say it's a legal maneuver that saves time and money while accomplishing the same ending.

"It's becoming more of a noticeable trend, with judges concerned about agreeing to settlements with defendants not making any admissions," said Robert Heim, a securities attorney in New York City and former SEC assistant regional director there.

"Judges are asking the SEC to justify its settlements with greater frequency, and that's disconcerting to an agency that's typically been given deferential treatment," he said.

In a New York federal court last week, a $602 million settlement between the SEC and hedge fund SAC Capital Advisors, managed by Steven Cohen, was stopped in its tracks.

"There is something counterintuitive and incongruous about settling for $600 million if it truly did nothing wrong," U.S. District Judge Victor Marrero said in a hearing.

Neither confirming nor denying responsibility has become standard fare in settling the civil cases, a practice the SEC says is a legitimate and necessary enforcement tool, largely for budgetary reasons.

Advertisement

The SEC is able to recover more quickly monies — sometimes into the millions of dollars — from those who allegedly earned them illicitly, and return them to victims. Yet the responsible parties are mostly able to walk away with what amounts in some cases to a hand-slap.

The SEC, according to a court filing, says this is its method of resolution in more than 90 percent of its cases. The agency, through a spokesman, would not comment.

Though some defendants are also prosecuted criminally, the number is small compared to those who are sued, according to a check of court records. The SEC can bring civil cases on its own, but criminal cases are prosecuted by the U.S. Attorney's Office.

As a result, admissions are often difficult to come by, and a protracted and expensive legal battle can be diffused via an easy settlement.

One of the first came two years ago when U.S. District Judge Jed Rakoff in Manhattan tossed out a $285 million settlement the SEC wanted with Citigroup.

The banking behemoth was accused of marketing toxic mortgage bonds while secretly betting against those very same investments.

Rakoff's issue was with the SEC's lack of clarity behind the settlement, mostly the hidden details of the agency's investigation leading to the deal, all of which deserved public review.

In an early decision, an appeals court agreed with the SEC's position that it's not up to judges to tell the agency how to handle its cases. Another appellate decision is pending.

Other judges followed suit. A deal with IBM was scuttled because it didn't offer enough proof of misdeeds. Another against a Ponzi scheme was rejected for having no detail behind the settlement itself other than disgorgement of proceeds.

"The few cases in which this has happened, it's the district judges who are frustrated," said Boulder securities lawyer Andrew Shoemaker, of Shoemaker, Ghiselli and Schwartz. "They see a situation where the alleged facts and schemes are a theme and the judges asking why the deal is that way. It seems like a cop-out to them. Perhaps the judge might think the SEC was too light on someone."

One of Shoemaker's clients, accused inside trader James Lieberman, got such a deal in August 2012. His consent decree was entered the same day as the complaint. Despite giving up nearly $150,000 in fines and disgorgement, he admitted nothing.

"Often it works that way, with a very quick turnaround," said Shoemaker, a former SEC enforcement attorney in Denver who was also a special assistant U.S. attorney.

Before Marrero's decision in New York last week, U.S. District Judge John Kane in Denver was the most recent to take issue with such a consent deal, a case involving an alleged Ponzi scheme that took dozens of investors for more than $15 million.

In its settlement offer with three defendants, the SEC was to collect about $6 million. No one would admit anything and the defendants would be barred from working in the financial sector.

Like other judges across the country, Kane balked on the deal, saying defendants had two choices: admit the allegations or fight them in court.

Until then, the judges who questioned the settlements had simply wanted additional details before signing.

Kane was even more reticent, seeing as none of the defendants — Michael Turnock, his company Bridge Premium Finance, and employee William Sullivan II — had actually answered any of the SEC's allegations.

The complaint was filed and then the settlements offered.

"I refuse to approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him," Kane wrote on Jan. 17.

The ruling had an immediate impact at the SEC, where lawyers quickly filed a motion for Kane to reconsider, saying his order was a "short-circuit" to the agency's normal practice.

"For more than a century, courts have approved consent judgments that impose substantial penalties based solely on allegations in complaints filed by federal agencies," SEC attorney Thomas Krysa wrote in the 14-page motion.

"The Commission is not aware of any precedent that authorizes courts to short-circuit the settlement process by requiring admissions as a condition precedent to the imposition of agree-upon penalties, with the only other option being trial," Krysa wrote.

To require either a trial or admission of responsibility would quash the agency's work.

It "would likely have a detrimental impact on the agency's enforcement program, resulting in fewer enforcement proceedings, and a net harm to the public interest," Krysa wrote.

At issue, too, is a defendant's ability to hammer out a deal. The ramifications of admitting to any accusation are huge, Shoemaker said.

"Admitting the allegations has so many implications, with private lawsuits that can pile on, and insurance coverages that might not apply," Shoemaker said. "That's not to mention the criminal implications. You're putting someone into the position to fight, and the SEC needs to spend less money to fight."

Securities attorney Martin Berliner in Denver agreed. "If you require people to admit in order to settle ... then you really have the wrath of God brought down on you," he said. "The SEC might have the moral high ground, and principle is nice, but reality is nicer."

Kane's order reverberated nationally.

"The Colorado order is very significant since it clearly sets out the choices and specific rejection of a defendant to settle without admissions. Rakoff didn't go that far," said Heim, the New York attorney. "I don't think it's a rogue judge, but a natural conclusion of a trend that's growing."

Kane ultimately backed away on the stance when Turnock pleaded guilty to criminal charges of securities fraud and did the same in answering the SEC's complaint.

But the issue lingers for Sullivan, a three-time felon who is representing himself.

The judge has yet to respond to the SEC's motion to reconsider Sullivan's deal.

"At the end of the day, the SEC consent program is not going to be derailed unless a court of appeals somewhere rejects the approach," Shoemaker said. "That's not happened yet."

Not all kids who play baseball are uniformed with fancy script across their chests, traveling to $1,000 instructional camps and drilled how to properly hit the cut-off man. Some kids just play to play.